Jill Lepore’s article explains that in many ways the United
States was founded of the debtors, by the debtors, for the
debtors.

We know from English literature that the United States
represented a fresh start for insolvents from the lower and upper
classes, which makes sense when we learn that both Dickens’
father went to debtor’s prison and Trollope’s father fled England
to avoid it.

What I didn’t know is that as many as two-thirds of Europeans
arriving in the Colonies were debtors, paying their way as
indentured servants. The colonial governments of Virginia
and North Carolina for their part, eager for laborers, passed
incentives by promising 5 years’ worth of debt protection.
The founder of Georgia, James Oglethorpe, specifically started
the colony as a debtor’s refuge in 1732, as an alternative to
English debtors’ prison.

Lepore makes the interesting comment that Founding Fathers
Jefferson and Washington were so up to their necks in debt to
London bankers that the Declaration of Independence from England
not only served democratic Enlightenment ideals but also their
own balance sheets.[2]

Debtor’s prison

Before reading Lapore’s article I had no idea that the English
tradition of locking up debtors in prison jumped the Atlantic and
came to the American colonies and the young United States.
Debtors through colonial times and the first 40 years of the
Republic routinely got locked up in brutal prisons – often for
very small amounts. There the debtor would stay,
half-starved and dependent upon alms from passers-by, until
someone – usually a relative – paid the debt.

New York became the first state in the nation to outlaw debtors’
prisons in 1831, paving the way for other states to follow suit.

You are not going to believe this[3], but in the 1800 to 1830 period, financial
traders typically received preferable treatment, by law, over
everybody else, when it came to insolvency.

If you were a stockbroker in 1800s Wall Street, for example, or
you engaged in financing merchandise shipping and trade, or
trading in agricultural commodity futures[4], you could declare bankruptcy if the business
went awry. But, if you were not a financier, you had no way
of getting clear of your debts, and you might face debtors’
prison.

In essence when debts became overwhelming, Lepore explains, a
bankruptcy law in 1800 allowed financiers to declare bankruptcy
and receive a fresh start, freed of their debts. Presumably
lawmakers justified this disparity through a logic similar to
today’s “Too Big To Fail” principal. If the brokerage
houses in turn of the 19th Century Wall Street
couldn’t work through their financial distress, well then my
goodness, what would happen to the economy????[5]

Since the bankruptcy law only applied to traders, everybody else
was liable to be thrown into debtors’ prison. Indefinitely,
in fact, until their debts got paid. Not until 1841 did
Congress pass a permanent bankruptcy law so that ordinary folks
could declare bankruptcy in the event of insolvency.[6]

So, if you were wondering whether the bailout of Wall Street in
2008 while Main Street suffered represented the nadir of
financial inequality and injustice, you’d be wrong. Early
19th Century injustices were even worse. There,
doesn’t that feel better now?

[2] Before reading Lepore’s piece I knew about
the historical train of thought that the Founding Fathers
were greatly motivated by selfish private interests, such as
keeping taxes low and protecting their own private property,
something that British sovereignty increasingly impinged upon
in the years leading up to the Declaration of
Independence. As a recovering banker, however, I
find the
we’re-up-to-our-necks-in-debt-let’s-cut-ties-with-our-bankers
argument plausibly intriguing. I’m sure Jefferson and
Washington were great guys and all, but any time you can
simultaneously establish a radical new experiment in
non-Monarchical government based on Enlightenment ideals and
wipe out your personally huge debts at the same time?
Wow, I mean, that’s a two-for-one. You kind of have to
do it.

[6] Lepore relates the story of a clever
insolvent who found a loophole in the bankruptcy law of 1800
that offered unequal treatment between traders and everyone
else. With extraordinarily large debts that had
previously landed him in jail, her hero John Pintard managed
to get a temporary reprieve from prison through a loophole in
the debtors’ prison laws. He took out an advertisement
in a newspaper that he was doing business as a stock
broker. Pintard then traded a single stock, pocketed
the fifty-eight cents profit (later donated to charity), and
filed for bankruptcy as a trader.